Varsities turn to private equity in hunt for funds

An American private equity fund is set to invest millions of shillings in academic and residential facilities at private universities in a deal expected to break new ground in the way Kenya’s institutions of higher learning will finance their operations in the next decade.

The projects include the development of external commercial space at the university at a cost of Sh1 billion raised from local and international investors.

In one such arrangement with a private university, Africa Integras Fund (AIF), is to build and operate the facilities for between 30 and 50 years before transferring ownership to the institution, according to a confidential brief seen by the Business Daily.

A portion of the profits from the development will be accumulated into an endowment fund for the benefit of the university, according to people familiar with the deal.

AIF is partnering with Cassia Capital Partners, a local corporate finance advisory services firm with an interest in East Africa’s emerging private equity market.

Cassia declined to answer questions on the matter, saying the parties are yet to conclude the deal. It could also not disclose the name of the university it had signed the deal with, saying doing so could scuttle the deal.

“Negotiations are ongoing and no figures have been agreed, neither do we have firm estimates on costs,” said Imtiaz Khan, the founding director at Cassia Capital.

Besides Kenya, AIF has Build Operate Transfer (BOT) projects in Rwanda, Sierra Leone, Tanzania, Uganda and Zambia.

If successful, private equity is expected to play an important role in the financing of universities and help reduce the financial burden on the institutions caused by heavy reliance on short term borrowing in local financial markets.

Private equity’s entry into the financing of Kenyan universities comes at a time when Barclays Bank is developing a university-specific debt instrument in the bonds market to be backed by the billions of shillings worth of assets held by public universities.

These financing initiatives have the potential of lowering the cost of education and increasing access to universities, according to analysts. University administrators said expansion of facilities tops the agenda of most colleges lending urgency to the search for new financing sources in the marketplace.

“We are talking to private equity funds for possible BOT deals to expand our facilities,” said Prof Henry Thairu, the vice chancellor at Inoorero University (formerly Kenya School of Professional Studies) that was last week granted a Letter of Interim Authority to become a private university.

The growing demand for higher education has continued to pile pressure on institutions to look for additional sources of financing, forcing a re-think of fund-raising strategies.

Demand for education services and the subsequent need for expansion is being fuelled by thousands of working Kenyans, seeking additional qualifications to remain relevant in a changing labour market.

Educationists say failure to push through new financing solutions that could help the universities develop new teaching facilities could throw the sub-sector into an admission crisis that will deny thousands of qualified candidates a chance to pursue higher education.

“We have had to think of a mix of financing options but when it comes to borrowing, the interest rates are still too high,” said Prof Freida Brown, the vice chancellor at the United States International University (USIU).

Heavy reliance on fees as a revenue stream has in turn tipped the scales in favour of upward adjustments that have blocked thousands of qualified students from getting university education.

It costs close to Sh1 million to complete a Bachelors degree programme at a private Kenyan university.

Educationists reckon that while the BOT model could sort out the financing dilemma for private universities, the public ones are barred by the University Act from entering into such arrangements.

“This could be a good model but it’s not an option for public universities unless the law is changed,” said Mr Benjamin Cheboi, the chief executive of the Higher Education Loans Board (Helb), which finances university education through loans to students.

Financing higher education has emerged as one of the biggest policy challenges for Kenya. Public universities finances have been particularly strained by the dwindling of Government disbursements to the institutions forcing most to stop development of new facilities on the campuses.

The success of Kenya’s higher education is bound to be judged by the ability of the institutions to absorb all qualified candidates, irrespective of whether or not they meet the country’s human capital demand.

This will be taken as the return on investment from the billions of shillings being pumped into the universities by the Government, parents, and guardians annually.

Helb is in the process of remodeling its fundraising strategies in the wake of high demand for loans.

The agency that has mainly relied on hand-outs from Treasury and recoveries from past borrowers to finance its operations, plans to reach out to sovereign wealth funds and big education scholarships and bursary funds for more money.

Sovereign wealth funds are state-owned investment vehicles into which surplus government finances are invested, especially in firms in need of a cash infusion and with a huge headroom for growth.

The new fund-raising initiatives are set to benefit thousands of university students who are currently grappling with high school fees.

School fees account for 60 per cent of an average Kenyan household’s annual spending, according to past studies.

Kenyan universities bear the dubious distinction of being the most expensive in East Africa, a development that is being blamed on the financing model.

Public universities for example have traditionally been financed largely through government allocations.

“Kenyan universities are facing unfavorable investment factors where even the economic risks to investors are poorly quantified,” said Mr John Odhiambo, the vice chancellor at Strathmore University.

“The cost of money is quite high in the country.”